Tuesday, March 19, 2013

For a long time my view on the euro has been that it may well have
been a mistake, but that bygones were bygones — it could not be undone. I
was strongly influenced by the view expressed by Barry Eichengreen in a
classic 2007 article
(although I had heard that argument — maybe from Barry? — long before
that piece was published): as Eichengreen argued, any move to leave the
euro would require time and preparation, and during the transition
period there would be devastating bank runs. So the idea of a euro
breakup was a non-starter.

But now I’m reconsidering, for a simple reason: the Eichengreen
argument is a reason not to plan on leaving the euro — but what if the
bank runs and financial crisis happen anyway? In that case the marginal
cost of leaving falls dramatically, and in fact the decision may
effectively be taken out of policymakers’ hands. (...)

Think of it this way: the Greek government cannot announce a policy of
leaving the euro — and I’m sure it has no intention of doing that. But
at this point it’s all too easy to imagine a default on debt, triggering
a crisis of confidence, which forces the government to impose a banking
holiday — and at that point the logic of hanging on to the common
currency come hell or high water becomes a lot less compelling.